Diesel rebates – A conditional loan from SARS

Very few beneficiaries of the diesel rebate system are aware that a diesel rebate from SARS is a provisional payment that can be reclaimed if the recipient does not fully comply with the rebate requirements. To add insult to injury a recent High Court case held that the incorrect completion of the VAT return in which the diesel rebate is claimed suspends prescription. In short, the diesel rebate loan never prescribes!

Introduction 

The diesel rebate system has been in operation in South Africa for many years. For some reason there still appears to be a cloud of mystery surrounding the rebate. SARS has recently commenced audits of diesel rebates in the farming and mining industries and have ruffled a few feathers.  

In this article we will attempt to lift the vail of mystery surrounding the diesel rebate and provide some insights into the main risks inherent in the system.

What is the diesel rebate system?

The diesel rebate is a rebate (refund) of the Fuel Levy and Road Accident Fund Levy for certain eligible users. 

It is a rebate governed by the Customs and Excise Act, although the actual refunds are administered through the VAT system. In practice this often causes confusion with regards to who should be interacted with in case of disputes. The short answer is, Customs and Excise. 

Who is eligible?

Essentially persons eligible for the rebate conduct activities where diesel is not used in activities related to the use of public roads. Examples are diesel used for power generation, farming, mining, offshore fishing, etc. 

The rebate is based on the proposition that a levy or tax for using public roads should not be borne by activities consuming diesel but not related to the use of such public roads.

The nature of the refund

The Customs and Excise Act classifies diesel rebates as provisional payments that may be recovered in the case of non-compliance with the requirements of the Customs and Excise Act. 

The Customs and Excise Act has very specific operational and documentary compliance requirements to ensure that rebates are only claimed on eligible purchases of diesel. This is understandable in the light of the fact that the original claim is virtually a blank cheque to claim a rebate on diesel purchases. 

The Customs and Excise Act allows SARS to reclaim any diesel rebate within a period of 2 years from the date that the refund was originally made. The 2-year rule does not apply where the application of the refund contained a false declaration.

In a recent High Court Case (Graspan Colliery SA (Pty) Ltd v CSARS (Case No. 8420/18), the court held that where an erroneous claim was made, the claim constitutes a false declaration as contemplated in the Customs and Excise Act. The 2-year rule therefore does not apply to incorrect claims. This means that SARS can go back as far as they wish to recover incorrect historical claims even if it resulted from a bona fide error.

What should you be on the lookout for?

The most critical issue is to ensure that detailed log books are maintained of all diesel purchased and issued to eligible machinery conducting eligible activities. The fact that a person only conducts eligible activities is irrelevant; the logbooks must be maintained.

Furthermore, diesel purchases must be delivered at the premises of the eligible user and issued from there to the eligible machinery. 

Full tax invoices must be obtained for all purchases of diesel in excess of R500 (the normal R5 000 VAT rule does not apply to tax invoices on which a diesel rebate is claimed).

Where sub-contractors are used to conduct eligible activities on behalf of the person claiming the diesel refunds, diesel rebates may only be claimed if the sub-contractors contract on a dry basis (i.e. the claimant issues the diesel to the sub-contractor). 

Summary

The above is a high-level overview of a quite complicated issue. If you are a diesel rebate user we recommend that you ensure that your operational processes are aligned with the specific requirements of the Customs and Excise Act. You may require professional assistance to navigate the mine field.